Mark W. Headley Chairman
Matthews International Capital Management, LLC
In the evolution of global trade and finance, China’s
relative increase in almost every level of economic
statistic over the last 30 years is one of the defining
events of our times. Yet, in many ways, China is still a
poor country with a per capita annual income of roughly
US$3,000 versus about US$40,000 for the U.S. When
pressured to address vital issues such as terms of trade,
human rights and the environment, China constantly
refers to its own internal challenges, external grievances
and long road to development.
Many developed countries are increasingly frustrated with
China’s unwillingness to “play by the rules.” China seems
to want the full benefits of access and membership to
the global system while maintaining unfair advantages.
The currency issue is the most obvious source of friction
for many developed and developing countries alike struggling to maintain jobs. China has frustrated the world
a great deal in the past 30 years and generally has paid
little or no price for its obstinacy. Access to China’s potentially
huge domestic markets is one of the obvious reasons
that other countries complain but seem to do little. No
one wants to be China’s “least favored” trading partner.
But tensions are rising and the need for major adjustments
is slowly becoming inevitable. So why does China behave
the way it does and how do we, as citizens of the world’s
most powerful nation, work with China?
Some months ago I made a crude attempt to describe
China’s psychology to a large group of professional U.S.
investors. I had precisely two minutes, so on a whim I
decided to lay out an alternative history of the U.S. with
the hope of giving the audience some understanding of
China’s domestic identity. So, forgive the vast revisionism
and crude reductionism, and please consider what our
national attitudes and debates might resemble if the U.S.
had gone through something like the Chinese experience.
A Revisionist’s History
Imagine if the U.S. had lost the War of 1812 against the
British. Instead of a messy end to a sideline for the then mighty
British Empire, the U.K. established total domination in key
American cities. The War ends with Manhattan transferred to
the British in perpetuity. Some 50 years later, they demand and
receive Long Island on a 99-year lease. Backed by British power,
other European nations demand their allotted piece of our
coastal cities and economy. Imagine if this outrage to a nation’s
sovereignty ended only 13 years ago with a formal handover
ceremony—the Union Jack finally replaced by the Stars and
Stripes in Times Square.
China and Britain went to war in 1839, largely because
China objected to the vast opium imports devastating its
domestic population. China’s forces were utterly defeated
and Hong Kong was later demanded as a national territory
of Britain. In a series of treaties, China was stripped
of much of the ability to manage its own terms of trade.
This set the tone for all future colonial depredations along China’s coast with European nations, and later Japan,
demanding the right to virtually run their own private
states within Chinese territory for much of the next
100 years. The demise of China’s 2,000-year-old imperial
system can be significantly attributed to this ruthless
attack on its sovereignty. Certainly, any hope of a smooth
movement to democracy was greatly diminished. India
did have the advantage (if it can be called that) of total
British domination in forming its democracy. China, on
the other hand, fell back after years of devastation on an
imperial model dressed in Marxist robes.
Imagine if the U.S. Civil War, so etched in our national
psyche, had not lasted four years and cost less than 1 million
lives, but rather lasted over 15 years and resulted in losses 20
times what we actually suffered. Imagine if Washington, D.C.,
not Richmond, Virginia was the capital of the Confederacy for
almost two decades.
China’s little known Taiping Rebellion lasted from 1850 to
1864. It was launched by a Cantonese farmer who interpreted
the Christian teachings he was exposed to by the
new Western presence to mean that he was the younger
brother of Jesus. Vast armies fought battle after battle, and
at least 20 million people died. The Taiping were finally
slaughtered after ruling much of central China from the
southern city of Nanjing. The Qing Dynasty was left even
further weakened in its ongoing battle with colonial powers.
Anyone who wonders why Chinese authorities are so
paranoid about Christian activity or other spiritual organizations,
like the Falun Gong, should study this history.
Imagine if the Japanese Imperial Navy had successfully captured
Hawaii following the attack on Pearl Harbor in December
1941. This setback allowed Axis forces to capture much of the
East (or West) Coast (take your pick) and hold that territory
through eight years of brutal warfare. Military and civilian
causalities in the tens of millions resulted. Many of America’s
major coastal cities are left devastated. We are saved by the
U.S.S.R’s defeat of Germany and Japan.
China, desperately weakened by its ongoing civil war
between the Nationalists and Communist forces, faced
direct Japanese hostilities in mid-1937. A bitterly divided
country fought the Japanese in battle after battle until Japan’s final collapse in 1945. China fought approximately
two-fifths of all Japanese forces in World War
II, perhaps keeping Japan from successfully invading
Australia and holding Southeast Asia against the Allied
counter-attack.
Imagine if the radical left successfully captured power during
the turmoil of the 1960s, and decided the best way to move
the U.S. forward was to close virtually every school, college
and university in the country for almost a decade. An entire
decade’s worth of students received little or no education and
floated through our society, terribly handicapped, ever since.
Many of our most precious national monuments and historical
artifacts were destroyed in the name of the new order.
China’s Cultural Revolution was unleashed by Chairman
Mao Zedong as a political move to distract the population
from the horror of the Great Leap Forward, a failed
economic plan that resulted in mass starvation. The
Cultural Revolution inflicted such chaos and brutality on
an already tortured nation that it is hard to grasp. There
remains in China a generation—who are roughly 50 to
60 years old today—that received little education. Being
educated in the Soviet Union saved, and indoctrinated, a
handful of the elite who run China today.
China’s View of the World
Each of the hypothetical examples above is flawed in any
number of ways, but may give some insight into how the
Chinese and its leaders view the world. The experiences
in the U.S. that truly compare to what has happened to
China in the last couple of centuries might resemble the
genocide of Native Americans and the slavery of African
Americans. Until the last 20 years, America’s worst decade
in the last 200 years would be far preferable to China’s
best decade. Imperial collapse, foreign invasion and civil
war have typified China’s modern experience. So when
China behaves brutally, petulantly and, so often, reactively,
this is largely a product of historical trauma of the
highest order—a proud and ancient nation brought to
its knees by both internal and external strife. Mao’s final
madness was a terrible gift to a nation that is searching for
a new path but remains distrustful of foreign nations and
obsessed with internal stability.
When we look today to solve complex issues such as China’s
fixed currency system, there are several implications:
China, its government and its citizenry, value
stability very highly. So anything that threatens
stability, whether that is a floating exchange rate (which
devastated richer neighbors in the Asian Financial Crisis)
or freedom for Tibet, will be treated with immense
caution. China’s citizens seem to have accepted Deng
Xioaping’s proposal, made in the shadow of the
Tiananmen Square protests, of encouraging economic
freedom while not tolerating challenges to the power
and ideology of the state. The Communist Party has
allowed a major degree of economic freedom, unleashing
a market economy, while forcefully putting off political
freedom to some distant future resolution. This is a deal
that the vast majority of Chinese have embraced, at least
while the economy is flourishing.
China will respond very negatively to harsh foreign
pressure. Threats and insults in foreign negotiations,
while often playing well to any nation’s domestic audience,
are unlikely to do anything but encourage Chinese
intransigency. China’s government does not dare to
appear weak before its own population and feels time is
on its side in most areas of friction. China sees negotiating
with the West as a 300-year continuum, and it is
playing the game very seriously with a huge commitment
to winning a few rounds after so many losses.
China, as a nation, is a developing economy, with all
the associated cultural baggage such terms imply in
a post-colonial world. But unlike most such nations,
China sees itself as a resurgent great power with the
tools required to meet the West and Japan on an even
playing field for the first time in the modern age. No
other nation is in a comparable position of returning to
greatness with a very large chip on the shoulder. This
will make negotiations difficult and, at times, virtually
impossible.
China’s industrial development, export success and rising
domestic market give it a very strong hand in global
negotiations. Today, we are literally in China’s shoes, or at
least our children are. Any trade war would devastate our
economy at least as much as China’s. Not to mention the
many implications of China’s holdings of U.S. dollars. The potential of China’s market—where car sales have now
exceeded those in the U.S., there are more cell phone users
than European Union citizens, and more Internet connections
than people in North America—keeps every nation
rightfully nervous about being excluded. A fear China has
used very effectively.
This is not an argument for handling China differently than
other nations. Most developing countries have similar histories
of colonial outrages and profound domestic trouble.
But to attempt to understand China, one must recognize
that a country that has been the Rome and Greece of Asia
for over 2,000 years, rightfully, has great pride—just as we
do. Its citizens know this history well. Sadly, we rarely know
much about our own history let alone China’s deep and
complex story.
I write this piece to warn against the simplistic notions
about China that permeate our media, and to challenge
the powerful special interests that want to paint China as
a nation to be attacked, not vigorously debated. We face
a long and very challenging dialogue with China, and I
believe knowledge is an infinitely better negotiating tool
than crude propaganda and simplistic nationalism.
Am I really saying China should be handled differently?
No, just intelligently.
For More on China, I Recommend:
“The Search for Modern China,” by Jonathan Spence
(The definitive history of modern China by our greatest
living China scholar; “God’s Chinese Son,” Spence’s book on
The Taiping is also an interesting read)
“China at the Center: 300 Years of Foreign Policy”
by Mark Mancall
“The Tiananmen Papers,” edited by Liang Zhang,
Andrew Nathan, Perry Link and Orville Schell
(A fascinating view into the Chinese leadership’s mind)
“One Billion Customers,” by James McGregor
“Asia, America and the Transformation of Geopolitics,”
by William Overholt
